Monday, August 8, 2011

Your Bad BATNA is Your Own Fault

Everyone, even professional negotiators, sometimes find themselves forced to negotiate with a bad BATNA.  In another post I looked at some of the ways you can still negotiate effectively with a bad BATNA but today I want to focus on the fact that our BATNAs, good and bad, are generally self-created. I'll go through some examples and then talk about how you can develop good BATNAs long before you even know you're going to be negotiating.

Walking the Dog

We recently got a puppy.  In order to keep the option of day and half-day trips to places Jordan can't come we found two local companies that offer dog-walking and "doggy day care" services.  One of the companies was well-established and the owner was a friend of a friend.  We knew several people who used her service.  The other was a relative newcomer.

I met first with the owner of the established company.  We had a good conversation about how her service worked and what they offered, and she a contract to fill out at my convenience if I wanted to hire them.  I always think you can learn a lot about a firm by the contracts they offer, so I skimmed through it as we talked and found several "interesting" terms.

As you can imagine, one problem a dog walking service has is preventing "poaching" by walkers.  The firm hires and trains young workers and then introduces them to clients, in exchange for which it keeps a significant cut of the walking fees.  The value provided by the firm is largely up front -- once the walker is trained and has met the client the client doesn't lose much by paying the walker directly so they split what the agency would normally get.  In order to avoid this problem, the owner had come up with a creative solution -- a $1,500 "referral" fee the client would pay if he or she hired one of the agency's walkers other than through the agency.

Another problem she must have had was collecting, and she had another solution -- a clause that said that the client was responsible for any legal fees the agency incurred in order to enforce the terms of the contract.

It's likely that if we hired that agency nothing would ever go wrong.  I have no interest in poaching and I pay my bills.  But disputes do happen, even in relationships where they seem unlikely.  When you sign a contract you need to ask how the terms of that contract will affect the resolution of disputes in the event that they do happen?

Let's say a couple of years from now I'm taking Jordan for a walk and we meet a college kid who mentions that he walks dogs to make some extra money.  Unbeknownst to me, he once worked for this agency -- or perhaps he actually walked Jordan once but I forgot.  The owner thinks that we're "poaching" and demands her fee.  Can I negotiate?  Not very effectively -- instead of a mutually unpleasant BATNA of going to court, the pain of court is all on my side because I'd have to pay her expenses.  She could even make my BATNA worse by mentioning that if we do go to court her attorney happens to be from a premium firm (i.e. very expensive for me)!

Inability to Tolerate a "Normal" BATNA

In discussing how to negotiate with a bad BATNA I mentioned my work with a healthcare non-profit that wanted to negotiate higher reimbursement rates.  One of our biggest challenges in those negotiations was that the organization's balance sheet was weak, meaning it couldn't easily afford the lost revenue that would come from temporarily refusing to accept any of the major insurers.  Put simply, their BATNA was weak and for purely internal reasons.

Sometimes it's not that your BATNA is all that bad but that you're unable to bear the costs of a moderately bad BATNA that is normal for the negotiation you face.  If a union can't afford to strike, a person can't afford to go to court or a client can't afford to change providers for a key service then their negotiation position is weak for potentially unnecessary reasons.

Creating Our Own Problem

All too often we create our own bad BATNA out of whole cloth.

For a vendor, two of the most beautiful words in the world are "switching costs".  Switching costs are expenses a customer needs to incur in order to change service providers, and companies work hard to build them in.  Some switching costs are natural.  If your company contracts out key services it's likely that any new provider would require at least a learning period before they provided as good a service.  In some areas, particularly involving software or services that are tightly intertwined with one's core business, switching costs can become prohibitive.  In extreme cases, a company can have no viable alternatives at any bearable cost.

Switching costs occur regularly in day-to-day life as well.  Loyalty programs are designed to create a benefit (e.g. miles) that loses some or all of its value if we don't continue to buy from that company.  Switching costs can be non-financial, too. My main email address, that I've used for many years, ends in the name of my cable company rather than and as a result there would be a non-trivial switching cost for me if we ever decide to change cable providers.

It's not realistic to avoid all switching costs, but excessive switching costs can be disastrous, especially if protective measures (e.g. a maximum annual fee increase) aren't built in.  If you can't afford to switch you have a terrible BATNA in any negotiation about pricing.

Avoiding Bad BATNAs

To reduce the number of situations in which you have a bad BATNA, the following steps are useful:

  1. Get used to thinking about the potential for disagreement.  Most people dislike conflict and in particular most people dislike thinking about future conflict at the start of a relationship.  At the same time, we recognize that disagreement, conflict and divergent interests exist in even the healthiest relationships.  (Just ask any successful business partners or happily-married couple!)  Get in the habit of asking yourself what the context for future disagreements is likely to be.  If it's tilted against you, the start of the relationship is the right time to act.
  2. Look forward, reason back.  At the start of any long-term relationship, imagine yourself (and, more importantly perhaps, your counterpart) in the future.  Does one of you have undue leverage over the other?  Are your interests diverging?  In my post about negotiating with a bad BATNA I gave the example of a homeowner who had some custom moulding made for his house and found himself with a bad BATNA when he wanted a small amount of additional work done using the same moulding.  He could easily have avoided that if he'd asked, "What will happen if it turns out I want some more work done?" and asked the contractor to agree at the start of the original job that any future work using that moulding would be done at a comparable rate.
  3. Build trust, social capital and mutual need.  There is a world of difference between negotiating with someone where you need them and where you need each other.  Similarly, integrated organizations can avoid painful games of brinkmanship if they develop social capital and norms that make such behavior unacceptable.  This is generally even more effective with individuals.
  4. Develop your BATNA before you need it.  If you're in the habit of looking forward and exploring the potential for future disagreements you can prepare for those disagreements by strengthening your BATNA so that if and when they arise you're in solid shape.  As a by-product, your strong BATNA may prevent disagreements from occurring at all, since your counterpart's incentive to force a renegotiation may not exist absent your weakness.

Above all, remember that your BATNA isn't something you're stuck with.  You can affect both how it starts and how it develops over time.

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